NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 29, 2014
(Unaudited
)
1.
BASIS OF PRESENTATION
The accompanying (a) condensed consolidated balance sheet of Regal Beloit Corporation (the “Company”) as of
December 28, 2013
, which has been derived from audited financial statements, and (b) unaudited interim condensed consolidated financial statements as of
March 29, 2014
and for the
three months ended
March 29, 2014
and
March 30, 2013
, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s
2013
Annual Report on Form 10-K filed on February 26, 2014.
In the opinion of management, all adjustments considered necessary for a fair presentation of financial results have been made. Except as otherwise discussed, such adjustments consist of only those of a normal recurring nature. Operating results for the
three months ended
March 29, 2014
are not necessarily indicative of the results that may be expected for the entire fiscal year ending
January 3, 2015
.
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. The Company uses estimates in accounting for, among other items, allowance for doubtful accounts; excess and obsolete inventory; share-based compensation; acquisitions; product warranty obligations; pension assets and liabilities; derivative fair values; goodwill and intangible impairment; health care; litigation claims and contingencies; and income taxes. The Company accounts for changes to estimates and assumptions when warranted by factually based experience.
The Company operates on a
52/53
week fiscal year ending on the Saturday closest to
December 31
.
The Company has a subsidiary in Venezuela using accounting for highly inflationary economies. Currency restrictions recently enacted by the Venezuelan government have the potential to impact the ability of the Company's subsidiary to obtain U.S. dollars in exchange for Bolivars at the official foreign exchange rate. In January 2014, the Venezuelan government announced the expansion of its auction-based foreign exchange system (SICAD1). In March 2014, the Venezuelan government introduced an additional auction-based foreign exchange system (SICAD2) which permits all companies incorporated or domiciled in Venezuela to bid for U.S. dollars. As of
March 29, 2014
, the SICAD1 and SICAD2 exchange rates were
10.7
and
50.9
Bolivars per U.S. dollar, respectively. The Company continued to remeasure the Venezuelan assets and liabilities at the official exchange rate of
6.3
Bolivars per U.S. dollar as of March 29, 2014 as that was the specified rate used to convert currency or settle transactions and the Company believes the official foreign exchange rate of 6.3 Bolivars per U.S. dollars remains legally available to it. As of
March 29, 2014
, the Company had Bolivar-denominated net monetary assets of approximately
$12 million
in Venezuela.
2.
OTHER FINANCIAL INFORMATION
Inventories
Inventories are valued at last-in, first-out (LIFO) for approximately
52%
and
49%
of the Company’s inventory as of
March 29, 2014
and
December 28, 2013
, respectively.
The approximate percentage distribution between major classes of inventories was as follows:
|
|
|
|
|
|
|
|
March 29,
2014
|
|
December 28,
2013
|
Raw Material and Work in Process
|
44
|
%
|
|
41
|
%
|
Finished Goods and Purchased Parts
|
56
|
%
|
|
59
|
%
|
Property, Plant and Equipment
Property, plant, and equipment by major classification was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life in Years
|
|
March 29,
2014
|
|
December 28,
2013
|
Land and Improvements
|
|
|
$
|
73.1
|
|
|
$
|
72.3
|
|
Buildings and Improvements
|
3 - 50
|
|
244.4
|
|
|
231.1
|
|
Machinery and Equipment
|
3 - 15
|
|
809.2
|
|
|
794.5
|
|
Property, Plant and Equipment
|
|
|
1,126.7
|
|
|
1,097.9
|
|
Less: Accumulated Depreciation
|
|
|
(544.0
|
)
|
|
(524.5
|
)
|
Net Property, Plant and Equipment
|
|
|
$
|
582.7
|
|
|
$
|
573.4
|
|
3.
ACQUISITIONS
The results of operations for acquired businesses are included in the Condensed Consolidated Financial Statements from the dates of acquisition. Acquisition related expenses, which were recorded in operating expenses, were
$0.5 million
and
$0.3 million
for the
three months ended
March 29, 2014
and
March 30, 2013
, respectively.
2014 Acquisitions
On
February 7, 2014
, the Company acquired Hy-Bon Engineering Company, Inc. (Hy-Bon) for
$77.0 million
, net of cash. The allocation of the purchase price is preliminary as of
March 29, 2014
. Hy-Bon is a leader in vapor recovery solutions for oil and gas applications and is reported in the Electrical segment.
2013 Acquisitions
On
February 8, 2013
, the Company acquired the RAM motor business previously owned by Schneider Electric for
$6.0 million
. This business manufactures hermetic motors from 250 hp to 2,500 hp for commercial HVAC applications and is reported in the Electrical segment.
On
November 19, 2013
, the Company acquired Cemp s.r.l. ("Cemp"), an Italy based electric motor company for
$32.0 million
, net of cash. Cemp is a leading designer, manufacturer and marketer of flameproof electric motors, and is reported in the Electrical segment.
4.
ACCUMULATED OTHER COMPREHENSIVE LOSS
Foreign currency translation adjustments, hedging activities and pension benefit adjustments are included in Equity in Accumulated Other Comprehensive Loss.
The changes in accumulated other comprehensive loss by component, net of tax, for the
three months ended
March 29, 2014
and
March 30, 2013
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 29, 2014
|
|
Hedging Activities
|
|
Pension Benefit Adjustments
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Beginning balance
|
$
|
(9.5
|
)
|
|
$
|
(23.3
|
)
|
|
$
|
(27.0
|
)
|
|
$
|
(59.8
|
)
|
Other comprehensive loss before reclassifications
|
(8.5
|
)
|
|
—
|
|
|
(4.2
|
)
|
|
(12.7
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
2.4
|
|
|
0.3
|
|
|
—
|
|
|
2.7
|
|
Net current period other comprehensive income (loss)
|
(6.1
|
)
|
|
0.3
|
|
|
(4.2
|
)
|
|
(10.0
|
)
|
Ending balance
|
$
|
(15.6
|
)
|
|
$
|
(23.0
|
)
|
|
$
|
(31.2
|
)
|
|
$
|
(69.8
|
)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 30, 2013
|
|
Hedging Activities
|
|
Pension Benefit Adjustments
|
|
Foreign Currency Translation Adjustments
|
|
Total
|
Beginning balance
|
$
|
(17.4
|
)
|
|
$
|
(41.9
|
)
|
|
$
|
(6.0
|
)
|
|
$
|
(65.3
|
)
|
Other comprehensive income (loss) before reclassifications
|
3.9
|
|
|
—
|
|
|
(5.3
|
)
|
|
(1.4
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
1.2
|
|
|
0.8
|
|
|
—
|
|
|
2.0
|
|
Net current period other comprehensive income (loss)
|
5.1
|
|
|
0.8
|
|
|
(5.3
|
)
|
|
0.6
|
|
Ending balance
|
$
|
(12.3
|
)
|
|
$
|
(41.1
|
)
|
|
$
|
(11.3
|
)
|
|
$
|
(64.7
|
)
|
The condensed consolidated income statement line item affected by the hedging activities reclassified from accumulated other comprehensive loss in the table above are disclosed in Note 13 of Notes to Condensed Consolidated Financial Statements.
The reclassification amounts for pension benefit adjustments in the table above are part of net periodic pension costs recorded in Operating Expenses (see Note 8 of Notes to Condensed Consolidated Financial Statements).
5.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
As required, the Company performs an annual impairment test of goodwill during the fourth quarter or more frequently if events or circumstances change that would more likely than not reduce the fair value of its reporting units below their carrying value.
The following information presents changes to goodwill during the periods indicated (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Electrical
Segment
|
|
Mechanical
Segment
|
Balance as of December 29, 2012
|
$
|
1,151.0
|
|
|
$
|
1,111.7
|
|
|
$
|
39.3
|
|
Acquisitions and Valuation Adjustments
|
15.3
|
|
|
15.3
|
|
|
—
|
|
Less: Impairment Charges
|
76.3
|
|
|
64.2
|
|
|
12.1
|
|
Translation Adjustments
|
(8.1
|
)
|
|
(7.8
|
)
|
|
(0.3
|
)
|
Balance as of December 28, 2013
|
1,081.9
|
|
|
1,055.0
|
|
|
26.9
|
|
Acquisitions and Valuation Adjustments
|
42.5
|
|
|
42.5
|
|
|
—
|
|
Translation Adjustments
|
(1.0
|
)
|
|
(1.1
|
)
|
|
0.1
|
|
Balance as of March 29, 2014
|
$
|
1,123.4
|
|
|
$
|
1,096.4
|
|
|
$
|
27.0
|
|
|
|
|
|
|
|
Cumulative Goodwill Impairment Charges
|
$
|
76.3
|
|
|
$
|
64.2
|
|
|
$
|
12.1
|
|
Intangible Assets
Intangible assets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2014
|
|
December 28, 2013
|
|
Useful Life
(years)
|
|
Gross Value
|
|
Accumulated
Amortization
|
|
Gross Value
|
|
Accumulated
Amortization
|
Customer Relationships
|
3 - 14
|
|
$
|
262.7
|
|
|
$
|
107.5
|
|
|
$
|
253.8
|
|
|
$
|
101.4
|
|
Technology
|
3 - 9
|
|
132.7
|
|
|
61.9
|
|
|
133.0
|
|
|
57.9
|
|
Trademarks
|
3 - 20
|
|
33.3
|
|
|
18.8
|
|
|
32.6
|
|
|
18.0
|
|
Patent and Engineering Drawings
|
10
|
|
16.6
|
|
|
15.4
|
|
|
16.6
|
|
|
15.0
|
|
Non-compete Agreements
|
3 - 5
|
|
8.3
|
|
|
7.8
|
|
|
8.3
|
|
|
7.8
|
|
|
|
|
$
|
453.6
|
|
|
211.4
|
|
|
$
|
444.3
|
|
|
200.1
|
|
Net Values
|
|
|
|
|
$
|
242.2
|
|
|
|
|
$
|
244.2
|
|
The estimated expected future annual amortization for intangible assets is as follows (in millions):
|
|
|
|
|
Year
|
Estimated
Amortization
|
2014
|
$
|
44.6
|
|
2015
|
36.9
|
|
2016
|
31.9
|
|
2017
|
25.7
|
|
2018
|
23.5
|
|
Amortization expense recorded
for the
three months ended
March 29, 2014
and
March 30, 2013
was
$11.3 million
and
$11.1 million
, respectively.
6.
BUSINESS SEGMENTS
The Company has two reportable segments: Mechanical and Electrical. Segment detail was (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
|
|
Mechanical
|
|
Eliminations
|
|
Total
|
As of and for Three Months Ended March 29, 2014
|
|
|
|
|
|
|
|
External sales
|
$
|
736.8
|
|
|
$
|
64.4
|
|
|
$
|
—
|
|
|
$
|
801.2
|
|
Intersegment sales
|
0.9
|
|
|
1.0
|
|
|
(1.9
|
)
|
|
—
|
|
Total sales
|
737.7
|
|
|
65.4
|
|
|
(1.9
|
)
|
|
801.2
|
|
Gross profit
|
178.3
|
|
|
16.1
|
|
|
—
|
|
|
194.4
|
|
Operating expenses
|
115.5
|
|
|
9.2
|
|
|
—
|
|
|
124.7
|
|
Income from operations
|
62.8
|
|
|
6.9
|
|
|
—
|
|
|
69.7
|
|
Identifiable assets
|
3,518.9
|
|
|
207.6
|
|
|
—
|
|
|
3,726.5
|
|
Depreciation and amortization
|
29.8
|
|
|
3.0
|
|
|
—
|
|
|
32.8
|
|
Capital expenditures
|
19.5
|
|
|
2.8
|
|
|
—
|
|
|
22.3
|
|
As of and for Three Months Ended March 30, 2013
|
|
|
|
|
|
|
|
External sales
|
$
|
711.0
|
|
|
$
|
67.2
|
|
|
$
|
—
|
|
|
$
|
778.2
|
|
Intersegment sales
|
0.9
|
|
|
1.2
|
|
|
(2.1
|
)
|
|
—
|
|
Total sales
|
711.9
|
|
|
68.4
|
|
|
(2.1
|
)
|
|
778.2
|
|
Gross profit
|
181.3
|
|
|
18.2
|
|
|
—
|
|
|
199.5
|
|
Operating expenses
|
114.0
|
|
|
9.6
|
|
|
—
|
|
|
123.6
|
|
Income from operations
|
67.3
|
|
|
8.6
|
|
|
—
|
|
|
75.9
|
|
Identifiable assets
|
3,441.3
|
|
|
237.1
|
|
|
—
|
|
|
3,678.4
|
|
Depreciation and amortization
|
28.4
|
|
|
3.2
|
|
|
—
|
|
|
31.6
|
|
Capital expenditures
|
18.5
|
|
|
2.1
|
|
|
—
|
|
|
20.6
|
|
7.
DEBT AND BANK CREDIT FACILITIES
The Company’s indebtedness as of
March 29, 2014
and
December 28, 2013
was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
December 28,
2013
|
Senior notes
|
$
|
750.0
|
|
|
$
|
750.0
|
|
Other
|
17.8
|
|
|
17.4
|
|
|
767.8
|
|
|
767.4
|
|
Less: Current maturities
|
(158.9
|
)
|
|
(158.4
|
)
|
Non-current portion
|
$
|
608.9
|
|
|
$
|
609.0
|
|
At
March 29, 2014
, the Company had
$750.0 million
of senior notes
(the “Notes”) outstanding. Details on the senior notes are (in millions):
|
|
|
|
|
|
|
|
|
|
Principal
|
|
Interest Rate
|
|
Maturity
|
Floating Rate Series 2007A
|
$
|
150.0
|
|
|
Floating
(1)
|
|
August 2014
|
Floating Rate Series 2007A
|
100.0
|
|
|
Floating
(1)
|
|
August 2017
|
Fixed Rate Series 2011A
|
100.0
|
|
|
4.1%
|
|
July 2018
|
Fixed Rate Series 2011A
|
230.0
|
|
|
4.8 to 5.0%
|
|
July 2021
|
Fixed Rate Series 2011A
|
170.0
|
|
|
4.9 to 5.1%
|
|
July 2023
|
|
$
|
750.0
|
|
|
|
|
|
|
|
(1)
|
Interest rates vary as LIBOR varies. At
March 29, 2014
, the interest rate was
0.9%
.
|
The Company has a
$500.0 million
revolving credit facility
(the “Facility”) that matures in
June 2016
. The Facility permits the Company to borrow at interest rates based upon a margin above LIBOR. The margin varies with the ratio of total funded debt to EBITDA, net of specified cash, as defined in the Facility. These interest rates also vary as LIBOR varies. The Company pays a commitment fee on the unused amount of the Facility, which also varies with the ratio of total funded debt to EBITDA. At
March 29, 2014
, the Company had no outstanding balance on the Facility,
$23.5 million
of standby letters of credit issued under the Facility and
$476.5 million
of available borrowing capacity.
At
March 29, 2014
, other notes payable of
$17.8 million
were outstanding with a
weighted average interest rate of
2.7%
. At
December 28, 2013
, other notes payable of approximately
$17.4 million
were outstanding with a weighted average interest rate of
2.7%
.
Based on rates for instruments with comparable maturities and credit quality, which are classified as Level 2 inputs, the
approximate fair value
of the Company's Notes was
$762.3 million
and
$779.6 million
as of
March 29, 2014
and
December 28, 2013
, respectively. The Company estimates that the fair value of other debt approximates book value.
The Notes and the Facility require the Company to meet specified financial ratios and to satisfy certain financial condition tests. The Company was in compliance with all financial covenants as of
March 29, 2014
. We believe that we will continue to be in compliance with these covenants for the foreseeable future.
8.
PENSION PLANS
The Company’s net periodic defined benefit pension cost is comprised of the following components (in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 29,
2014
|
|
March 30,
2013
|
Service cost
|
$
|
0.6
|
|
|
$
|
0.7
|
|
Interest cost
|
2.0
|
|
|
1.8
|
|
Expected return on plan assets
|
(2.3
|
)
|
|
(2.0
|
)
|
Amortization of prior service cost and net actuarial loss
|
0.6
|
|
|
1.1
|
|
Net periodic benefit expense
|
$
|
0.9
|
|
|
$
|
1.6
|
|
The
estimated net actuarial loss
and
prior service cost
for defined benefit pension plans that will be amortized from Accumulated Other Comprehensive Loss into net periodic benefit cost during the
2014 fiscal year
is
$2.0 million
and
$0.2 million
, respectively.
During the
first
quarter of
2014
and
2013
, the Company contributed
$0.5 million
and
$0.5 million
, respectively, to defined benefit pension plans. The Company expects to make contributions of
$7.9 million
in
2014
. The Company contributed a total of
$5.5 million
in
2013
. The assumptions used in the valuation of the Company’s pension plans and in the target investment allocation have remained the same as those disclosed in the Company’s
2013
Annual Report on Form 10-K filed on
February 26, 2014
.
9.
SHAREHOLDERS’ EQUITY
The Company recognized approximately
$2.7 million
and
$2.3 million
in
share-based compensation expense
for the
three months ended
March 29, 2014
and
March 30, 2013
, respectively. The
total excess income tax benefit recognized relating to share-based compensation
for the
three months ended
March 29, 2014
and
March 30, 2013
was approximately
$1.0 million
and
$0.6 million
, respectively. The Company recognizes compensation expense on grants of share-based compensation awards on a straight-line basis over the vesting period of each award. As of
March 29, 2014
,
total unrecognized compensation cost related to share-based compensation awards
was approximately
$18.9 million
, net of estimated forfeitures, which the Company expects to recognize over a weighted average period of approximately
2.2
years.
Approximately
3.0 million
shares were available for future grant or payment under the 2013 Equity Incentive Plan at
March 29, 2014
.
Options and Stock Appreciation Rights
The Company uses several forms of share-based incentive awards, including non-qualified stock options, incentive stock options, and stock appreciation rights (“SARs”). Options and SARs generally vest over
5
years, are granted at prices equal to the fair market value of the stock on the grant dates, and expire
10
years from the grant date. The majority of the Company’s annual share-based incentive awards are made in the fiscal second quarter. There were no share-based incentive awards granted in the
first quarter
of
2014
.
A summary of share-based awards (options and SARs) as of
March 29, 2014
follows below. Forfeitures of share-based awards during the
three months ended
March 29, 2014
were immaterial.
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
Shares
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
(years)
|
|
Aggregate Intrinsic
Value (in
millions)
|
Outstanding
|
1,428,483
|
|
|
$57.27
|
|
6.1
|
|
$
|
20.3
|
|
Exercisable
|
718,641
|
|
|
$50.13
|
|
4.5
|
|
15.3
|
|
Restricted Stock Awards and Restricted Stock Units
Restricted stock awards ("RSA") and restricted stock units ("RSU") consist of shares or the rights to shares of the Company's stock. The awards are restricted such that they are subject to substantial risk of forfeiture and to restrictions on their sale or other transfer. RSU awards are typically granted to eligible employees outside of the United States. As defined in the individual grant agreements, acceleration of vesting may occur under a change in control, or death, disability or normal retirement of the grantee.
During the quarter ended March 29, 2014, RSA and RSU awards had immaterial grant, vesting and forfeiture activity.
Performance Share Units
Performance share unit ("PSU") awards consist of shares or the rights to shares of the Company's stock which are awarded to employees of the Company. These shares are payable upon the determination that the Company achieved certain established performance targets and can range from
0%
to
200.0%
of the targeted payout based on the actual results. PSUs have a performance period of
3
years. As set forth in the individual grant agreements, acceleration of vesting may occur under a change in control, death or disability. There are no voting rights with these instruments until vesting occurs and a share of stock is issued. PSU awards are valued using a Monte Carlo simulation method as of the grant date.
During the quarter ended March 29, 2014, there was no grant or vesting of PSU awards and forfeitures were immaterial.
10.
INCOME TAXES
The effective tax rate for the
three months ended
March 29, 2014
was
26.2%
versus
23.2%
for the
three months ended
March 30, 2013
. The change in the
first
quarter
2014
effective rate was primarily driven by the benefit realized in the first quarter of 2013 for the retroactive reinstatement of the research and development tax credit. The lower effective rate as compared to the
35.0%
statutory Federal income tax rate is driven by lower foreign tax rates.
As of
March 29, 2014
and
December 28, 2013
, the Company had approximately
$3.5 million
and
$4.4 million
, respectively, of unrecognized tax benefits, all of which would affect its effective tax rate if recognized. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense.
With few exceptions, the Company is no longer subject to U.S. Federal and state/local income tax examinations by tax authorities for years prior to
2010
, and the Company is no longer subject to non-U.S. income tax examinations by tax authorities for years prior to
2008
.
11.
EARNINGS PER SHARE ("EPS")
The numerator for the calculation of basic and diluted earnings per share is Net Income Attributable to Regal Beloit Corporation. The denominator is computed as follows (in millions):
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 29,
2014
|
|
March 30,
2013
|
Denominator for basic EPS (weighted average)
|
45.1
|
|
|
45.0
|
|
Effect of dilutive securities
|
0.3
|
|
|
0.3
|
|
Denominator for diluted EPS (weighted average)
|
45.4
|
|
|
45.3
|
|
The “Effect of dilutive securities” represents the dilution impact of equity awards.
For the
three months ended
March 29, 2014
and
March 30, 2013
, respectively, there were
0.7 million
and
0.6 million
o
ptions where the exercise price was above the average market price which were excluded from the calculation of the effect of dilutive shares as the effect of such options was anti-dilutive.
12.
CONTINGENCIES
One of the Company’s subsidiaries that it acquired in
2007
is subject to numerous claims filed in various jurisdictions relating to certain sub-fractional motors that were primarily manufactured through
2004
and that were included as components of residential and commercial ventilation units marketed by a third party. These claims generally allege that the ventilation units were the cause of fires. Based on the current facts, the Company does not believe these claims, individually or in the aggregate, will have a material effect on its interim condensed consolidated financial statements as a whole.
The Company is, from time to time, party to litigation that arises in the normal course of its business operations, including product warranty and liability claims, contract disputes and environmental, asbestos, employment and other litigation matters. The Company’s products are used in a variety of industrial, commercial and residential applications that subject the Company to claims that the use of its products is alleged to have resulted in injury or other damage. The Company accrues for exposures in amounts that it believes are adequate, and the Company does not believe that the outcome of any such lawsuit individually or collectively will have a material effect on the Company's financial position, its results of operations or its cash flows.
The Company recognizes the cost associated with its standard warranty on its products at the time of sale. The amount recognized is based on historical experience.
The following is a reconciliation of the changes in accrued warranty costs for the
three months ended
March 29, 2014
and
March 30, 2013
(in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 29,
2014
|
|
March 30,
2013
|
Beginning balance
|
$
|
19.3
|
|
|
$
|
20.9
|
|
Payments
|
(5.6
|
)
|
|
(4.3
|
)
|
Provision
|
4.4
|
|
|
3.8
|
|
Acquisition
|
0.1
|
|
|
1.2
|
|
Ending balance
|
$
|
18.2
|
|
|
$
|
21.6
|
|
13.
DERIVATIVE INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are commodity price, currency exchange and interest rate risk. Forward contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company’s manufacturing process. Forward contracts on certain currencies are entered into to manage forecasted cash flows in certain foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s floating rate borrowings.
The Company must recognize all derivative instruments as either assets or liabilities at fair value in the condensed consolidated balance sheets. The Company designates commodity forward contracts as cash flow hedges of forecasted purchases of commodities, currency forward contracts as cash flow hedges of forecasted foreign currency cash flows and interest rate swaps as cash flow hedges of forecasted LIBOR-based interest payments. There were no significant collateral deposits on derivative financial instruments as of
March 29, 2014
.
Cash flow hedges
For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive loss and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or changes in market value of derivatives not designated as hedges are recognized in current earnings. All derivative instruments used by the Company impact operating cash flows.
At
March 29, 2014
, the Company had
$(0.7) million
, net of tax, of derivative losses on closed hedge instruments in Accumulated Other Comprehensive Income (“AOCI”) that will be realized in earnings when the hedged items impact earnings. At
December 28, 2013
, the Company had
$(0.7) million
, net of tax, of
derivative losses on closed hedge instruments in AOCI
that was realized in earnings when the hedged items impacted earnings.
As of
March 29, 2014
, the Company had outstanding the following currency forward contracts (with maturities extending through December 2015) to hedge forecasted foreign currency cash flows (in millions):
|
|
|
|
|
|
Notional
Amount
|
Mexican Peso
|
$
|
218.2
|
|
Chinese Renminbi
|
159.4
|
|
Indian Rupee
|
37.5
|
|
Euro
|
11.4
|
|
Thai Baht
|
4.5
|
|
Australian Dollar
|
2.1
|
|
As of
March 29, 2014
, the Company had outstanding the following commodity forward contracts (with maturities extending through
June 2015
) to hedge forecasted purchases of commodities (notional amounts expressed in terms of the dollar value of the hedged item in millions):
|
|
|
|
|
|
Notional
Amount
|
Copper
|
$
|
159.9
|
|
Aluminum
|
8.9
|
|
As of
March 29, 2014
, the total notional amount of the Company’s receive-variable/pay-fixed interest rate swaps was
$250.0 million
(with maturities extending to
August 2017
).
Fair values of derivative instruments as of
March 29, 2014
and
December 28, 2013
were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2014
|
|
Prepaid
Expenses and Other Current Assets
|
|
Other
Noncurrent
Assets
|
|
Hedging
Obligations
(current)
|
|
Hedging
Obligations
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.8
|
|
|
$
|
15.0
|
|
Currency contracts
|
5.3
|
|
|
1.3
|
|
|
2.8
|
|
|
1.1
|
|
Commodity contracts
|
0.1
|
|
|
—
|
|
|
8.1
|
|
|
0.1
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
Currency contracts
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
Commodity contracts
|
1.3
|
|
|
0.1
|
|
|
1.4
|
|
|
0.1
|
|
Total Derivatives
|
$
|
6.7
|
|
|
$
|
1.4
|
|
|
$
|
16.2
|
|
|
$
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2013
|
|
Prepaid
Expenses and Other Current Assets
|
|
Other
Noncurrent
Assets
|
|
Hedging
Obligations
(current)
|
|
Hedging
Obligations
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5.7
|
|
|
$
|
16.1
|
|
Currency contracts
|
8.4
|
|
|
0.7
|
|
|
3.0
|
|
|
0.7
|
|
Commodity contracts
|
4.0
|
|
|
—
|
|
|
1.7
|
|
|
—
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
Currency contracts
|
—
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
Commodity contracts
|
0.7
|
|
|
—
|
|
|
0.8
|
|
|
—
|
|
Total Derivatives
|
$
|
13.1
|
|
|
$
|
0.7
|
|
|
$
|
11.3
|
|
|
$
|
16.8
|
|
The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income (pre-tax) for the
three months ended
March 29, 2014
and
March 30, 2013
, was (in millions):
Derivatives Designated as Cash Flow Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 29, 2014
|
|
March 30, 2013
|
|
Commodity
Forwards
|
|
Currency
Forwards
|
|
Interest
Rate
Swaps
|
|
Total
|
|
Commodity
Forwards
|
|
Currency
Forwards
|
|
Interest
Rate
Swaps
|
|
Total
|
Gain (loss) recognized in Other Comprehensive Income (Loss)
|
$
|
(12.9
|
)
|
|
$
|
(0.7
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(13.8
|
)
|
|
$
|
(7.6
|
)
|
|
$
|
13.7
|
|
|
$
|
0.2
|
|
|
$
|
6.3
|
|
Amounts reclassified from Other Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss recognized in Net Sales
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
Gain (loss) recognized in Cost of Sales
|
(2.5
|
)
|
|
1.9
|
|
|
—
|
|
|
(0.6
|
)
|
|
0.6
|
|
|
0.8
|
|
|
—
|
|
|
1.4
|
|
Loss recognized in Interest Expense
|
—
|
|
|
—
|
|
|
(3.2
|
)
|
|
(3.2
|
)
|
|
—
|
|
|
—
|
|
|
(3.2
|
)
|
|
(3.2
|
)
|
The ineffective portion of hedging instruments recognized during the
three months ended
March 29, 2014
and
March 30, 2013
was immaterial.
Derivatives Not Designated as Cash Flow Hedging Instruments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 29,
2014
|
|
March 30,
2013
|
|
Commodity Forwards
|
|
Currency Forwards
|
|
Commodity Forwards
|
|
Currency Forwards
|
Gain (loss) recognized in Cost of Sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.2
|
)
|
|
$
|
0.2
|
|
The
net AOCI hedging component balance of
$(15.6) million
loss at
March 29, 2014
includes
$(9.1) million
of
net current deferred losses expected to be realized in the next twelve months
.
The Company's commodity and currency derivative contracts are subject to master netting agreements with the respective counterparties which allow the Company to net settle transactions with a single net amount payable by one party to another party. The Company has elected to present the derivative assets and derivative liabilities on the Condensed Consolidated Balance Sheets on a gross basis for the periods ended
March 29, 2014
and
December 28, 2013
.
The following table presents the derivative assets and derivative liabilities presented on a net basis under enforceable master netting agreements (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 29, 2014
|
|
Gross Amounts as Presented in the Condensed Consolidated Balance Sheet
|
|
Derivative Contract Amounts Subject to Right of Offset
|
|
Derivative Contracts as Presented on a Net Basis
|
Prepaid Expenses and Other Current Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
$
|
5.3
|
|
|
$
|
(1.6
|
)
|
|
$
|
3.7
|
|
Derivative Commodity Contracts
|
1.4
|
|
|
(1.4
|
)
|
|
—
|
|
Other Noncurrent Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
1.3
|
|
|
(0.5
|
)
|
|
0.8
|
|
Derivative Commodity Contracts
|
0.1
|
|
|
(0.1
|
)
|
|
—
|
|
Hedging Obligations Current:
|
|
|
|
|
|
Derivative Currency Contracts
|
2.9
|
|
|
(1.6
|
)
|
|
1.3
|
|
Derivative Commodity Contracts
|
9.5
|
|
|
(1.4
|
)
|
|
8.1
|
|
Hedging Obligations:
|
|
|
|
|
|
Derivative Currency Contracts
|
1.1
|
|
|
(0.5
|
)
|
|
0.6
|
|
Derivative Commodity Contracts
|
0.2
|
|
|
(0.1
|
)
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2013
|
|
Gross Amounts as Presented in the Condensed Consolidated Balance Sheet
|
|
Derivative Contract Amounts Subject to Right of Offset
|
|
Derivative Contracts as Presented on a Net Basis
|
Prepaid Expenses and Other Current Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
$
|
8.4
|
|
|
$
|
(0.6
|
)
|
|
$
|
7.8
|
|
Derivative Commodity Contracts
|
4.7
|
|
|
(2.4
|
)
|
|
2.3
|
|
Other Noncurrent Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
0.7
|
|
|
(0.2
|
)
|
|
0.5
|
|
Hedging Obligations Current:
|
|
|
|
|
|
Derivative Currency Contracts
|
3.1
|
|
|
(0.6
|
)
|
|
2.5
|
|
Derivative Commodity Contracts
|
2.5
|
|
|
(2.4
|
)
|
|
0.1
|
|
Hedging Obligations:
|
|
|
|
|
|
Derivative Currency Contracts
|
0.7
|
|
|
(0.2
|
)
|
|
0.5
|
|
14.
FAIR VALUE
The Company uses a three-tier hierarchy to assess the inputs used to measure the fair value of financial assets and liabilities.
|
|
|
Level 1
|
Unadjusted quoted prices in active markets for identical assets or liabilities
|
Level 2
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or
|
|
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
|
|
Inputs other than quoted prices that are observable for the asset or liability
|
Level 3
|
Unobservable inputs for the asset or liability
|
The Company uses the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The fair value of the Company's cash equivalents, term deposits, accounts receivable and accounts payable approximated book value as of
March 29, 2014
and
December 28, 2013
, respectively, due to their short-term nature. See Note 7 of Notes to Condensed Consolidated Financial Statements for disclosure of the approximate fair value of the Company's debt at
March 29, 2014
and
December 28, 2013
.
The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of
March 29, 2014
and
December 28, 2013
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
December 28,
2013
|
|
Classification
|
Assets:
|
|
|
|
|
|
Prepaid Expenses and Other Current Assets:
|
|
|
|
|
|
Derivative Currency Contracts
|
$
|
5.3
|
|
|
$
|
8.4
|
|
|
Level 2
|
Derivative Commodity Contracts
|
1.4
|
|
|
4.7
|
|
|
Level 2
|
Investments
|
1.1
|
|
|
7.6
|
|
|
Level 2
|
Other Noncurrent Assets:
|
|
|
|
|
|
Assets Held in Rabbi Trust
|
5.1
|
|
|
5.1
|
|
|
Level 1
|
Derivative Currency Contracts
|
1.3
|
|
|
0.7
|
|
|
Level 2
|
Derivative Commodity Contracts
|
0.1
|
|
|
—
|
|
|
Level 2
|
Liabilities:
|
|
|
|
|
|
Other Accrued Expenses:
|
|
|
|
|
|
Deferred Contingent Purchase Price
|
8.3
|
|
|
8.3
|
|
|
Level 3
|
Hedging Obligations (current):
|
|
|
|
|
|
Interest Rate Swap
|
3.8
|
|
|
5.7
|
|
|
Level 2
|
Derivative Currency Contracts
|
2.9
|
|
|
3.1
|
|
|
Level 2
|
Derivative Commodity Contracts
|
9.5
|
|
|
2.5
|
|
|
Level 2
|
Hedging Obligations:
|
|
|
|
|
|
Interest Rate Swap
|
15.0
|
|
|
16.1
|
|
|
Level 2
|
Derivative Currency Contracts
|
1.1
|
|
|
0.7
|
|
|
Level 2
|
Derivative Commodity Contracts
|
0.2
|
|
|
—
|
|
|
Level 2
|
Other Noncurrent Liabilities:
|
|
|
|
|
|
Deferred Contingent Purchase Price
|
1.5
|
|
|
1.4
|
|
|
Level 3
|
The Company’s derivative contracts are valued at fair value using the market or income approaches. The Company measures the fair value of foreign currency exchange contracts using Level 2 inputs based on observable spot and forward rates in active markets. The Company measures the fair value of commodity contracts using Level 2 inputs through observable market transactions in active markets provided by financial institutions. The Company measures the fair value of investments using Level 2 inputs based on quoted market prices for similar instruments in active markets. The Company measures the fair value of interest rate swaps using Level 2 inputs in an income approach for valuation based on expected interest rate yield curves over the remaining duration of the interest rate swaps. During the
three months ended
March 29, 2014
, there were no transfers between classification Levels 1, 2 or 3.
The table below sets forth a summary of changes in fair market value of the Company’s Level 3 liabilities for the
three months ended
March 29, 2014
and
March 30, 2013
(in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 29,
2014
|
|
March 30,
2013
|
Beginning Balance
|
$
|
9.7
|
|
|
$
|
21.1
|
|
Valuation Adjustments
|
0.4
|
|
|
0.3
|
|
Payments
|
(0.3
|
)
|
|
—
|
|
Ending Balance
|
$
|
9.8
|
|
|
$
|
21.4
|
|
The liabilities described above are comprised entirely of the deferred contingent purchase price of the Company's acquisitions and are measured using Level 3 inputs. The fair value was determined using valuation techniques based on risk and probability adjusted discounted cash flows.
(15) RESTRUCTURING ACTIVITIES
During fiscal 2013 the Company announced the closure of several of its manufacturing and warehouse facilities and consolidation into existing facilities to simplify manufacturing operations in its Electrical segment. As a result of these closures, the Company incurred expenses including employee termination and plant relocation costs. The employee termination expenses are accrued over the vesting period while the plant relocation costs are expensed as incurred.
The following is a reconciliation of provisions and payments for the restructuring projects for the
three months ended
March 29, 2014
and
March 30, 2013
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
March 30,
2013
|
Beginning balance
|
|
$
|
3.9
|
|
|
$
|
3.1
|
|
Provision
|
|
4.2
|
|
|
0.9
|
|
Less: Payments
|
|
2.6
|
|
|
0.8
|
|
Ending Balance
|
|
$
|
5.5
|
|
|
$
|
3.2
|
|
The following is a reconciliation of expenses by type for the restructuring projects for the
three months ended
March 29, 2014
and
March 30, 2013
, respectively (in millions):
|
|
|
|
|
|
|
|
|
|
March 29,
2014
|
|
March 30,
2013
|
Employee termination expenses
|
$
|
1.4
|
|
|
$
|
0.4
|
|
Property, plant and equipment disposals
|
1.6
|
|
|
0.3
|
|
Other expenses
|
1.2
|
|
|
0.2
|
|
Total restructuring expenses
|
$
|
4.2
|
|
|
$
|
0.9
|
|
For the
three months ended
March 29, 2014
, restructuring charges of
$4.2 million
were recorded in Cost of Sales. For the
three months ended
March 30, 2013
, restructuring charges of
$0.5 million
and
$0.4 million
were recorded in Cost of Sales and Operating Expenses, respectively.
The Company's current restructuring activities are expected to conclude by the fourth quarter of 2014.